In 2020, as the government mandated business closures, many small businesses secured Payroll Protection Plan (PPP) loans from the federal government to maintain the cash flow necessary to pay expenses and keep employees on the payroll. For North Carolina businesses who received a PPP loan, you may be eligible for additional cash due to a change in tax law that happened late in 2021.
First, the background. When the PPP loan was first passed, there was uncertainty about the tax implications of these forgivable loans. It took Congress a couple of tries to settle on the tax treatment. Ultimately, they landed on the most favorable possibility for businesses: the forgiven loan would not be treated as income AND expenses paid by the loan were deductible as normal business expenses. Receive a forgiven $20,000 loan and use it for payroll? The $20,000 doesn’t count as income, but the expenses can be used to reduce your overall net profit for tax purposes.
Unfortunately, the state of North Carolina was slow to adopt this same position. Initially the legislature “decoupled” from federal law and said that while the forgiven loan was not income, the business expenses were not deductible. For many businesses, this was the law when they filed their 2020 and 2021 tax returns.
As part of the Chamber of Catawba County’s Advocacy@Work program, we realized that this put our businesses at a competitive disadvantage. Nearly every other state had adopted the favorable federal position. We joined a coalition of chambers from across North Carolina to advocate for North Carolina to adopt the federal treatment. In November of 2021, a change to the law was signed by the governor, making these expenses a deductible business expense.
For a small business taxed as self-employed or an S-corp, this could mean that the state owes you 5% of the value of your PPP loan. But the state won’t pay you automatically. In order to receive the money you are owed, you need to file an amended tax return. The Department of Revenue has published this notice with details.
If you received a PPP loan, consult with your tax advisor to determine your eligibility to receive a refund due to this change, and file your amended tax return.
